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Goldman: Go Short Vs CHF, Too


Goldman Sachs note that “GBP underperformance is our strongest G10 FX view at the moment. While the UK faces a similar trade-off as other major central banks between slowing growth and well-above-target inflation, the BoE has chosen to place a relatively bigger weight on the growth outlook while still relying on supply-side factors to bring inflation down to target. While the merits of this approach are subject to debate, what matters for markets is it is de facto a weak currency policy. In light of the BoE's differing policy trajectory, we are again revising down our forecast for GBP/USD to $1.19, $1.22 and $1.25 in 3, 6 and 12 months (from $1.22, $1.26 and $1.31 previously). We have already recommended that investors go long EUR/GBP (with a target of GBP0.87) to position for this theme, and today we are adding a recommendation to go short GBP/CHF (with a target of CHF1.18 and stop at CHF1.24). We believe the SNB will take a harder line against above-target inflation (the SNB has arguably the lowest inflation aim in the world) and therefore take steps to avoid real currency depreciation. With the ECB likely to lift off in July, and SNB meetings only in June and September, it complicates the tactics for the SNB somewhat. A preemptive hike in June, an intermeeting hike, or balance sheet action cannot be ruled out. Given the variety of potential policy tools, we think this trade is better in FX than rates which should be a more direct approach to the policy goal. Our main motivation for this trade is to isolate the policy differential, but it is also negatively correlated with risk sentiment. We think that is appropriate, but it is also the key risk to the trade, in our view.”

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